Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Hi, i am very confused when the slope of the indifference curve, it was negative and then it becomes positive when rearranging ? please explain

image text in transcribed

Hi, i am very confused when the slope of the indifference curve, it was negative and then it becomes positive when rearranging ? please explain

image text in transcribedimage text in transcribed
uo=U(C1)+ \"(C1). 1 + p Assume now that we change consumption in the two periods in such a way that lifetime utility is kept constant. Then we must have: '((02) 1+p where AC, and AC; denote small changes in consumption in the two periods. Hence the slope of the indifference curve is AC2 3" (C1) Ac,' u(ca)/(1+p)' The slope of the mdi'erence curve is the marginal rate of substitution between consumption in the two periods. It is the ratio of the marginal utilities of consumption in the two periods, as seen from period 1. \"'(Cl)ACI + AC2=0: consumption next period - that is, 1 + r. Thus the optimal consumption/savings decision is characterized by the following condition: u'(C1) u' (C2) / (1 + p) =1+r. In order to see the implications of this condition, it is useful to divide by 1 + p on both sides: u (C) 1+r u' (C2) 1+ p If the subjective discount rate is equal to the market rate of interest, the right- hand side is equal to unity, which means that the left-hand side must also be equal to unity. This can only be true if consumption is equal in the two periods. Thus we see that, if the subjective discount rate is equal to the market rate of inter- est, the consumer will plan for consumption to be constant over time. This is a consequence of the preference for smooth consumption. Independent of how much income the individual gets in different periods, she wants to save (or bor- row) so as to smooth consumption over time. This is illustrated in Fig. 4.5 where the tangency points illustrate optimal consumption choice for two consumers with different incomes in the two periods. Two different consumers with different incomes in the two periods, here given by points A and B, will consume different amounts, but each will consume the same amount in both periods

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Marketing

Authors: John McMurry, Robert Fay

13th Edition

125973806X, 9781259738067

More Books

Students also viewed these Economics questions

Question

How is a bivariate outlier identified in a scatterplot?

Answered: 1 week ago

Question

What are the APPROACHES TO HRM?

Answered: 1 week ago

Question

What do you mean by dual mode operation?

Answered: 1 week ago

Question

Explain the difference between `==` and `===` in JavaScript.

Answered: 1 week ago

Question

4. What means will you use to achieve these values?

Answered: 1 week ago

Question

3. What values would you say are your core values?

Answered: 1 week ago